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ETF Trading and Commissions: The Edge in Returns
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A number of traders are now looking to exchange-traded funds to reduce their trading costs and increase their profits. For the savvy trader, there are two ways that exchange-traded funds can help reduce both your trading costs and commissions.
If you're considering ETF trading, realize that a number of brokers now offer commission free trades on exchange-traded funds. A number of companies have now created their own branded ETFs or partnered with another firm to allow free trades on a number of popular exchange-traded funds.
A reduction in trading commissions is good news for just about any trader utilizing any strategy. Longer term investors interested in ETF trading can set up a system to buy once a week, or even every paycheck, and dollar-cost average into ETF positions without amassing large commission costs. Short term ETF traders may save hundreds of dollars per week in commissions, greatly increasing the profitability of their trading strategies.
Another big reason why more and more traders are moving to ETF trading is a decrease in spreads and an increase in volume and liquidity. While stock brokers make their money with commissions, market makers, much like foreign exchange brokers, make their money in the spreads. The spread is simply the difference between the current bid and ask prices.
If an exchange-traded fund has bids at $25.10 and ask prices at $25.20, the spread is ten cents. That is, to buy at market, a buyer would pay the ask price, and to sell at market, he or she would receive the bid price. The difference is the profit for the market maker.
The good news is that as the amount of volume and liquidity rise, the spreads go down. As a result, on high volume exchange-traded funds, those interested in ETF trading can routinely drop their spreads to only a few pennies per share. For example, SPY, the popular exchange-traded fund built around the S&P500 index, usually offers spreads of less than one cent. In contrast, CNY, an ETF designed to track changes in Chinese currency, has a spread much larger at 6 cents per share.
One of the most common reasons traders move to ETF trading is that a low-spread ETF can often be used as an alternative to a single stock. For instance, the ETF GLD, which has a spread equal to less than .00007% of a share and tracks the change in gold, could be used as a substitute for the single mining stock AZK, which has a spread equal to .016% of the share price. Therefore, if you were to move to ETF trading to obtain the same exposure to gold, the exchange-traded fund would cost only a fraction of the spread cost of a single stock.
If you haven't yet explored ETF trading, make it a top priority. With the added liquidity and lower costs, as well as the capacity for commission free trades, now is an excellent time to make the switch.
Trade ETFs for Free
If you're considering ETF trading, realize that a number of brokers now offer commission free trades on exchange-traded funds. A number of companies have now created their own branded ETFs or partnered with another firm to allow free trades on a number of popular exchange-traded funds.
A reduction in trading commissions is good news for just about any trader utilizing any strategy. Longer term investors interested in ETF trading can set up a system to buy once a week, or even every paycheck, and dollar-cost average into ETF positions without amassing large commission costs. Short term ETF traders may save hundreds of dollars per week in commissions, greatly increasing the profitability of their trading strategies.
Reducing Costs
Another big reason why more and more traders are moving to ETF trading is a decrease in spreads and an increase in volume and liquidity. While stock brokers make their money with commissions, market makers, much like foreign exchange brokers, make their money in the spreads. The spread is simply the difference between the current bid and ask prices.
If an exchange-traded fund has bids at $25.10 and ask prices at $25.20, the spread is ten cents. That is, to buy at market, a buyer would pay the ask price, and to sell at market, he or she would receive the bid price. The difference is the profit for the market maker.
The good news is that as the amount of volume and liquidity rise, the spreads go down. As a result, on high volume exchange-traded funds, those interested in ETF trading can routinely drop their spreads to only a few pennies per share. For example, SPY, the popular exchange-traded fund built around the S&P500 index, usually offers spreads of less than one cent. In contrast, CNY, an ETF designed to track changes in Chinese currency, has a spread much larger at 6 cents per share.
One of the most common reasons traders move to ETF trading is that a low-spread ETF can often be used as an alternative to a single stock. For instance, the ETF GLD, which has a spread equal to less than .00007% of a share and tracks the change in gold, could be used as a substitute for the single mining stock AZK, which has a spread equal to .016% of the share price. Therefore, if you were to move to ETF trading to obtain the same exposure to gold, the exchange-traded fund would cost only a fraction of the spread cost of a single stock.
ETFs: Good for Any Trader
If you haven't yet explored ETF trading, make it a top priority. With the added liquidity and lower costs, as well as the capacity for commission free trades, now is an excellent time to make the switch.
